Tax change waiting game is costing us

We are just over half-way through the current tax year and yet again there is no clarity on the major tax changes that will bring about what has been dubbed tax harmonisation for retirement funds, which could take effect from March next year.

Recently, I left a parliamentary workshop on retirement saving reform with the distinct feeling that retirement fund issues are receiving far less attention than they should.

Only a few members of the committee felt it worthwhile turning up for a matter that could have a bearing on our later lives for some 30 years. And the discussion among those present was very unfocussed.

One of four senior National Treasury officials trying to capture the members’ attention was Ismail Momoniat, the deputy director-general of tax and financial sector policy. He told committee members who attended the workshop that, since 2012, Treasury had had 33 meetings with the National Economic Development and Labour Council (Nedlac) and labour constituencies.

Despite these meetings, the introduction of the alignment of tax deductions and tax paid on savings across retirement funds was delayed last year for a year and it is unclear if it will be delayed again.

The Income Tax Act was in fact amended in 2013 after National Treasury proposed – and Parliament passed – new tax deductions for contributions to retirement funds. These were due to come into effect from March 1 this year.

But last year, as retirement funds and their administrators and employers were making changes to their systems and educating members, Treasury, under pressure from the labour movement, asked Parliament to delay the implementation of the law.

The unions were demanding that the retirement reforms be part of more comprehensive social security reform. They demanded that a document on social security reform be released before they would agree not to cause trouble over the amendment, which had already been approved by Parliament.

So now fast-forward a year. The Income Tax Act is currently set to bring about the tax harmonisation from March 1 next year, and no amendment to delay this again is currently before Parliament. But there is uncertainty in the air.

Momoniat told the members of Parliament in the finance committee that no agreement has been reached in Nedlac and that members should decide what to do.

The comprehensive social security plan demanded by labour is no closer to release than it was last year – unless it is a well-kept secret.

Momoniat urged the members of Parliament to regard retirement reform as urgent and reminded them that delaying the tax changes was costing members and benefiting people who should not benefit.

I hope the few who heard him got the message. Delaying the implementation of the tax amendment for a year has meant:

Most of us contributing to employer-sponsored funds losing out on higher tax deductions as the new deductions will be based on taxable income or remuneration and not retirement funding income as is currently the case;

The wealthy continuing to enjoy a tax deduction for contributions to a retirement fund above R350 000 a year when this tax subsidiy could be put to better use;

Provident fund members not enjoying tax deductions for their contributions for another year;

The self-employed losing out on tax incentives to save for retirement of up to 27.5 percent of remuneration or taxable income. They are currently limited to 15 percent of their income; and

No opportunity for those members of occupational retirement funds whose employers do not contribute the maximum, to increase their own contributions.

When the tax deductions are harmonised, provident fund members will be expected to buy an annuity with retirement savings made after the date of implementation – but everything saved to date will be unaffected. There are some exceptions, which are likely so see some provident fund members with smaller savings amounts never having to buy an annuity.

There was a lot of noise last year about retirement fund members resigning to get their hands on their savings before the law changed. Seems this was a red herring.

Treasury told Parliament that its analysis shows the resignations were confined to members of the Government Employees Pension Fund (GEPF) and were not related to the tax harmonisation.

Momoniat said the problem was the high level of indebtedness among GEPF members and the fact that their pension fund statements showed the tempting lump sums they would receive if they resigned.

He says that the GEPF statements need to show member what their retirement savings will convert to as a pension at retirement and to emphasise the other benefits of remaining employed, including medical benefits in retirement.

Momoniat says although there was a 38-percent increase in resignations last year, the resignations still amounted to only about three percent of the membership last year and less the year before.

The fuss made last year seems to be misplaced. All retirement fund members, including those in unions, should be making a fuss to demand what will ultimately be in our interests. There are other ways to demand a comprehensive social security policy.

The tax harmonisation is just one of many reforms Treasury has its heart set on. In addition, it wants to lower the costs of retirement, encourage you to preserve your savings, encourage you to buy a pension at retirement and improve the value you get from annuities that provide pensions in retirement, all of which will ultimately deliver us to a better retirement and save the government from funding old-age grants.

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